Understanding Risk-Adjusted Return: PPFAS Long Term Value Fund

Published: June 17, 2014 at 1:32 pm

Last Updated on September 4, 2018

Risk adjusted return is a measure of the risk involved in producing a return. In this post we try and understand this concept using  PPFAS Long Term Value Fund which has recently completed one year in existence.

Kindly note that this is not a review or a recommendation of the fund. I am only using its numbers to understand risk adjusted returns.

Disclosure: I am an investor in this fund.

Investment mandate

It has a unique investment mandate. Some extracts(edited) from the scheme information document.

  • Seek to generate long-term capital growth from an actively managed portfolio primarily of Indian equities and foreign equities and related instruments and debt securities.
  • Buying securities at a discount to intrinsic value will help to create value for  investors. Our investment philosophy is to invest in such value stocks.
  • The Scheme will  evaluate different companies based on their long term prospects (5 years and more) rather than just looking at next quarter or a few quarter’s earnings.
  • Since the objective of the Scheme is to hold the investments in  the companies where the Scheme has invested for the long term, it is essential that the investors in the Scheme have a similar outlook.
  • It is expected that the core equity portfolio of the Scheme will have low churn (portfolio turnover).

The scheme can invest in:

1) Equity and equity related instruments

i. Stocks
ii. Derivatives (exchange traded and over the counter trade)
iii. Index futures, Put Options and Swaps
iv.  Special situation/Arbitrage

2) Debt securities

3) Money Market Instruments

4) Investment in Securitised Debt

5) Investment in Mutual Fund Schemes

6) Foreign Securities (only equity and equity related instruments)

i. ADRs/ GDRs issued by Indian or foreign companies
ii. Equity of overseas companies listed on recognized stock exchanges overseas
iii. Initial and follow-on public offerings for listing at recognized stock exchanges overseas
iv. Derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing
with underlying as securities.
v. Units/securities issued by overseas mutual funds or unit trusts registered with overseas regulators and
investing in (a) aforesaid securities, (b) Real Estate Investment Trusts (REITs) listed in recognized stock
exchanges overseas or (c) unlisted overseas securities (not exceeding 10% of their net assets)

Pretty much everything!

Portfolio

This is the portfolio as on 31st May 2014

Current Folio

Here is how the equity/equity related holdings have evolved since inception.

PPFAS LTVF NAV

 

While the other types of holdings have more or less fluctuated around current levels, the equity related holdings have been gradually increased, most likely with an intention to participate in the rally.

While the outperformance with respect to CNX 500 is nothing much to shout about as it is still very early days for the funds, notice that the fluctuations in the NAV movement are lower than that of the benchmark.

Thus, even visually one can conclude that the fund has delivered higher returns with by taking lower risk. Let us try and see if can do better with some numbers.

Returns

Ongoing SIP since an year ago

PPFAS LTVF: 63.32%

CNX 500: 55.02%

Lump sum invested an year ago

PPFAS LTVF: 41.77%

CNX 500: 33.23%

Great! Shall we shut shop and hope for the best?

Not quite. What is the risk associated with these higher returns? Were they obtained by taking more risk? How good is the downside protection of the fund?

These are questions we must train ourselves to ask before we start rejoicing.

1) How correlated is the funds NAV movement with that of the index?

About 96% correlated

Metric which tells us this: R-squared

2) How volatile is the fund when compare with the index?

About 7% less volatile

Metric which tells us this: Beta

3) How much do returns (daily) vary from the average of such returns?

About 0.64% for the fund and about 1% for the benchmark. Meaning the fund deviates from the average lesser than the benchmark, implying lower volatility

Metric which tells us this: Standard deviation

4) How high is the realized return when compared to the return corresponding to the risk taken by the investor?

Assuming 9% corresponds to the return earned with no risk (pre-tax FD rate say), the realized return of the fund is about 30% higher than the return corresponding to the risk taken by the investor.

Metric which tells us this: Jensen’s Alpha

Although there are underlying assumptions which are debatable, safe to say that the fund has outperformed the benchmark on risk adjusted basis!

5) Did the returns stem from excess risk or smart investing?

Dividing the return by risk (standard deviation)   allows you to find out if the returns stems from excess risk or smart investing.

Metric which tells us this: Sharpe Ratio

In this context, return refers to the average excess return (fund-return subtracted by risk-free-rate) and risk is the standard deviation.

On this count, the PPFAS fund management team has outperformed the index by about 80%.

So the fund has a higher return/per unit risk than the benchmark.

Thus, the returns stem from smart investing. This is more important that higher returns.

6) What is the probability of a large loss?

PPFAS LTVF has 50% lower probability of a large loss when compared to CNX 500

Metric which tells us this: Sortino Ratio

What do you think is the reason for this?  A well diversified portfolio!

7) How much do returns (daily) vary from a minimum expected return?

Assuming the minimum expected annual return is 15%, the deviation of the fund from this return is 44% lower than the benchmark! That is excellent downside protection

Metric which tells us this: Downside Deviation

8) How stressful has it been for PPFAS LTVT investors?

Metric which tells us this: Ulcer Index! Read more about this here

The Ulcer index is a much more stringent measure of downside protection.

PPFAS LTVF has lowered investor stress by 7% when compared to CNX 500. Not great but not insignificant either.

There are many more measures!! I will however stop here.

All these measures are part of the mutual fund risk and return analyser. Do give it a try.

 

Do share if you found this useful

How to profit from content writing: is our new ebook for those interested in getting side income via content writing. It is at available at a 50% discount for Rs. 500 only!
Did you know? We have more than 900+ videos on YouTube to explore! Join our YouTube Community!

Use our Robo-advisory Excel Template for a start-to-finish financial plan!

Join our courses in exclusive Facebook Groups!

  • 520+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2125+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps